Law:

Section:

Section 40(b), read with section 171(9), of the Income-tax Act, 1961 - Business disallowance - Interest, salary, etc., paid by firm to partner - Assessment years 1988-89 to 1990-91 - All partners of assessee partnership firm were members of erstwhile HUF - Consequent upon partial partition made in March 1979, deposit with firm was divided among members - Assessee's claim for deduction of interest paid to divided coparceners in HUF was disallowed holding that assessee had paid interest to coparceners in their individual capacity and not to HUF and such payment was inadmissible under section 40(b) - Whether , interest payments made by firm, though to partners, should be treated as if firm had made payments to HUF and such payments were not hit by section 40(b) - Held, yes Section 171 of the Income-tax Act, 1961 - Hindu undivided family - Assessment after partition - Assessment years 1988-89 to 1990-91 - Whether when section 171(9) statutorily declares a partial partition taking place after 31-12-1978 as null and void, consequences and incidents which flow from such statutory declaration are that HUF shall be deemed to continue for purpose of Act and it shall be owner of property and further it shall be deemed to be recipient of income from such property for purposes of Act - Held, yes FACTS The assessee was a partnership firm consisting of five partners and all sharing profit or loss at 20 per cent each in the firm. All the partners were members of an erstwhile HUF and the HUF deposited the Family Funds in the assessee-firm as a deposit. There was a partial partition in March, 1979 in the HUF in respect of the said deposit and the same was divided equally among the coparceners and these sums were held in deposits in separate folios in the assessee-firm and interest was credited to the depositors. The assessee-firm claimed in the assessment proceedings that the interest paid to the divided coparceners in the HUF should be allowed as deduction in the computation of its business income. The Assessing Officer held that the partial partition effected was a nullity and the assessee-firm had paid interest to the coparcener's in their individual capacity and such…

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